Comparative Costs and Elasticities of Substitution as Determinants of Inter- and Intra-Industry Trade

Intra-industry trade, i.e. the simultaneous imports and exports of the same statistical product group, has become an increasingly important part of world trade, in particular in the exchange of goods among developed countries (for a survey of findings see Tharakan, 1983). This fact has initiated empirical research on the causes of intra-industry trade. Attempts to explain differences in the share of intra-industry trade of total trade among different industries or product groups in terms of characteristics of the product or the market have been made, e.g. for the UK by Greenaway and Milner (1984), for the US by Toh (1982) and Bergstrand (1983), and for a sample of developed economies by Finger and De Rosa (1979), Loertscher and Wolter (1980) and Caves (1981). The explanatory variables used in these studies are generally assumed to capture some aspect of the concept of product differentiation. They include measures based on the statistical classification itself (e.g. subdivisions of the SITC or the BTN), as well as R&D costs, advertising expenditures, product age and measures of concentration and economies of scale. The basic hypothesis is that the higher the degree of product differentiation in an industry, the more intra-industry trade there will be.